Fitch Ratings sees the outlook on Sri Lanka's insurance sector as stable even though the split of composite insurers into life and nonlife companies, which became mandatory effective February 2015, may create industry uncertainty. This is based on the view that most insurers will maintain stable financial fundamentals in 2016, supported by moderate sector growth, Fitch says in a new report published today.

Fitch views the many regulatory changes as positive for the industry as they will promote efficient capital
allocation, corporate governance, and better risk management. Minimum regulatory capital has been increased to LKR500m from LKR100m, riskbased capital (RBC) will replace the current rulesbased solvency regime by 2016, and insurance companies with few exceptions are required to list by 2016.

Intense pricing competition in the motor segment is likely to hold the combined ratios (sum of loss ratio and expense ratio) in nonlife above 100%, which would put pressure on the financial performance of the more aggressive companies, while challenging the market share of others.

Fitch expects economic growth and underpenetration in the market to support the growth of total gross written premiums (GWP). Fitch does not expect significant improvement in life penetration in the short term, due to the low disposable income of the population, and life premiums growth is likely to be moderate. Fitch expects nonlife growth to slow as higher vehicle taxes may reduce new car registrations in 2016.